In an interview with Hugh Hewitt, the Republican Senator who backed Bowles-Simpson hinted that a bipartisan deal to cut the buget deficit might include a reduction in the tax deduction for interest on home mortgages "What there’ll be is there’ll be a limitation on it for one home," Coburn said, "and a limitation on the size of the home, probably, $500,000 dollars." Now check out the response:
Hugh Hewitt: Oh, my gosh. Won’t you kill the real estate market?
Tom Coburn: I don’t think so.
Hugh Hewitt: Oh, boy, that’s going to be tough to swallow. So you’ve got Republicans who agree with that?
Tom Coburn: Well, you know, the point is that that’s what the Deficit Commission had, so that’s what we’re starting from. We’re not talking about any of the things that we’re actually doing right now.
A bit later on the two argue about the proposal:
HH: Yeah, but I’m wondering, how would you propose to take away, for example, the mortgage interest deduction if the government hasn’t even done something like get rid of 80 teacher quality programs?
TC: Well, here’s the goal. The goal is to eliminate tax credits where we quit sending capital in the wrong direction, because the government says to send it that way. And so what you do is you take any money that’s savings from that, and lower everybody’s rates. So the whole deal is to get a renewal of our economic endeavor by lowering everybody’s income tax rates. So it’s a net net.
HH: Oh, I understand that, but I do not understand how you expect to sell something that would dramatically devalue people’s homes. That’s what I…
TC: There’s nothing that dramatically devalues people’s home. What we’re saying is the interest rate deduction on a $500,000 dollar home is deductible. If you have a million dollar home, and this is forward, it’s not what people have now, it’s moving forward. So if you already have it…
HH: No, no, I’m just saying that if you do that, though, you’ll lower the value of every new home bought, because the value of the interest deduction’s priced into that. Isn’t housing dying right now?
TC: Well, let me tell you something, Hugh, the average price of a home in America is not $500,000 dollars. It’s right around $210,000 dollars right now. That’s the average price.
HH: But the latter…well, we’ll have to come back and talk about this…
TC: And so you’re going to cover, we’re going to cover 95% of the people in their homes today.
HH: I’ll come back and talk with you about it next time, because that’s a disaster from the home building industry’s perspective. But I’ll talk to you about it next time.
The shorter version: Senator Coburn is trying to address the budget deficit and lessen a huge distortion of the market that's built into the tax code. And Hewitt panics. Yes, it's going to be a tough call to get the fiscal changes we desperately need.